I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.

Who? You must be a U.S. citizen (including dual citizens) who has resided outside the U.S. since January 1, 2009 and has not filed a U.S. tax return during that period, and you must be low risk. You can go into the Offshore Voluntary Disclosure Program (OVDP) of course, but if you are “low risk,” this deal is easier and cheaper with no penalties.

Low Risk? Take a look at this Questionnaire to evaluate your risk. If you owe less than $1,500 in tax each year and don’t have high risk factors you should be fine. What’s high risk? Any of these:

If you claim a refund!

You have “material economic activity” in the U.S.

You haven’t declared all your income in your country of residence.

You are under audit or investigation by the IRS.

You had prior FBAR penalties or an FBAR warning letter.

You have an interest or authority over an account outside your country of residence.

You have a financial interest in an entity outside your country of residence.

You have U.S. source income.

There are indications of sophisticated tax planning or avoidance.

It’s not clear (at least to me) if you could have one of these and still be judged low risk. But if you make a submission but are judged to be high risk, you don’t qualify and will be examined. That could include more than three years, like opting out of the OVDP.

Filings Due? Taxpayers utilizing this procedure will be required to file three years of tax returns and information returns (like Forms 3520 and 5471), plus six years of FBARs. Any taxes and interest you owe must accompany the returns. For a summary see IRS Fact Sheet FS-2011-13.

No Amended Returns!If you filed returns but didn’t report all income, you can’t amend via this program.Amended returns are high risk, except for the sole purpose of filing Form 8891 regarding retirement or savings plans by treaty.

Prosecution? Curiously, there’s no amnesty from criminal prosecution if the IRS and Department of Justice determine your particular circumstances warrant it. Consult your legal adviser, as the OVDP may be safer. See OVDP page. But once you submit under this new streamlined program, the OVDP is no longer available.

Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached atWood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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“You have an interest or authority over an account outside your country of residence.”

If one is a middle class American citizen working overseas and one has a US bank account which is “outside your country of residence”, then this may qualify one as being “high risk”?

I thought that it was a great thing for American citizens to invest into America, but now it might be a high risk to invest into America? That doesn’t sound good. I had asked the IRS if US accounts (offshore and foreign) need to be declared on FBARs, but was told that such is not necessary.

I’m sure that this is another of the many situations where the circumstances of living abroad are not being taken into consideration, yet it sad how often this is repeated over and over again.

You raise a good point. It is hard for me to imagine that the IRS could be referring to U.S. accounts here, but I suppose it isn’t clear. Presumably they are referring to non-U.S. and non-country of residence accounts. Yet even that interpretation may not help many.

In Europe, for example, it seems common for people to have accounts in several countries just as a matter of course. Perhaps that makes them high risk, but one could certainly argue that it should not, at least not in all cases.

In all of the FBAR cases I have seen, there was ignorence of the law, reliance on foreign professionals, error because foreign taxes were being paid and foreign tax returns filed, etc. I file “reasonable cause” memoranda in these cases without joining any of the amnesty programs for any of my clients. Frankly, the IRS is looking for those hiding large assets, money laundering, criminal activity – and that is consistent with the legislative history of the FBAR statute.

Yes, I suspect you are right. Yet the IRS has drawn a stark distinction between two groups of taxpayers who have failed to file FBARs. In the first group are taxpayers who have file fully compliant U.S. tax returns reporting all worldwide income. In the latter group are those who have not.

In the former case, filing past due FBARs outside the program with an explanation is common. The IRS has even encouraged it. But that doesn’t help taxpayers in the second group, those who not only didn’t file FBARs but didn’t report all income.

As you suggest, much of it is on a fairly small scale and was not intentional wrongdoing. Yet there is no easy answer outside the program for addressing it with assurance. Thanks.

I suspect that at least some Americans who moved abroad years ago, now wish that they had formally renounced their US citizenship as soon as they got their new citizenship. Some American Canadians commenting on Toronto’s Globe and Mail web site in the recent months have noted that they have spent thousands of dollars hiring local accountants versed in US tax law trying to comply with onerous US tax and financial disclosure regulations. Unfortunately, if you are an American living in France or Canada, you don’t have a Congressman or even a Senator to complain to. For older Americans who worked both in the US and in a foreign country, now live abroad and are out of compliance with their US filings, will their Social Security benefits at risk? Will they be opening up another can of worms if they even bother applying for benefits while they are still out of compliance?

I agree there is no easy answer and that it is especially frustrating for Americans abroad. The expatriation rules are tricky themselves, and also seems quite a drastic action. Under current law it can also appear to be a Catch 22, with expatriation requiring tax forms to file. I suspect some Americans abroad hoped the new streamlined compliance program would be broader than it appears to be.

As to your Social Security question, I believe there is law on that subject in the case of expatriation and that it can depend on treaty provisions. Thus, there is complexity on that subject too.

There seems to be a contradiction in the IRS instructions. They state: “This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk as described below.

Amended returns submitted through this program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty.”

On the one hand, it says that if one filed a 2009 return, one is ineligible for the program. On other hand, it states that one may file an amended return in order to submit to Form 8891. Is the Form 8891 an exception to the prior rule?

Do you know if there is a number in the IRS which specializes in this program?